What is financial transformation, and is there something new in the term that matters to organizations wanting to transform digitally?
If one looks back at the history of information technology — prior to the coining of the term “digital transformation” — IT was predominantly focused upon back-office automation and the extracting of cost from these business processes. To a large degree, this wave of IT investment was responsible for much of the business productivity gains over the last 50 years.
However, with the advent of digital transformation thinking, the focus for IT shifted to the front office and to using digital technologies (social, mobile, analytics, cloud, and internet of things) to transform customer experience and increase the business value delivered to customers. In digital transformation, the technology directly impacts business models — how organizations make money and deliver value to its customers. Digital transformation, also, results in digital offerings that create new, digital value propositions.
In an introductory conversation with a new friend, she said that her fiancée’s job was about “financial transformation.” I respond politely that was an oxymoron. Her initial response was to laugh and then she said it really is a made-up term.
But this left me wanting to know if others using the term. And more importantly, what is financial transformation, and is there something new in the term that matters to organizations wanting to transform digitally?
Defining Financial Transformation
According to Steven Krueger at Ernst and Young, “In the face of unprecedented digital innovation, resource constraints and pressures for cost reduction, the demands on finance operations and technology to modernize have never been greater.” He goes on to say, “Finance is in a perpetual state of transition, and leaders are struggling to effectively align talent with the barrage of demands. All the while CFOs and CIOs are being asked to modernize finance, reduce cost, provide resiliency and strengthen controls with less budget.”
Without question, Kruger says, “Organizations are evolving at record pace as digital transformation continues to drive prevailing changes across the front, middle and back offices. Shifts in consumer preferences are driving incessant product innovation to enable increasingly frictionless and convenient user experiences in the race to protect or create competitive advantages.”
Given the above business change, proponents of financial transformation claim the finance function needs to operate at a speed that matches the front-office. Innovations that are taking place there are putting increased pressure on the back-office operations.
For example, as organizations shift to more agile ways of working and launch unprecedented volumes of new products and solutions, organizations continue to rely on legacy operating financial models with rigid development cycles and overburdened resources. As a result, finance and IT teams can’t address the system and process ecosystem fast enough. With business teams chasing new revenues and business models, finance shouldn’t become a blocker — rather they should become a transformation enabler.
Related Article: Digital Trailblazer: Drive Consequential Digital Transformations
The CIO Response
So, the business case is that operationally, functions need to modernize in order to better support agile, digital organizations. What do CIOs think? The responses varied.
Joanna Young, who is a former Michigan State University and Liberty Mutual CIO and who did a stint as AVP of Finance, said, “What this is like is spinning straw into gold. Is there an API for that?”
Pedro Martinez Puig, CIO for Payments Processor Edenred, said, “Definitely this is not an ostensible self-contradiction, but a compelling real opportunity to make finance’s operating model cope with the rapid pace of startups and native digital models. For me, financial planning, budgeting and forecasting are a great starting point.”
Providing a business justification, Miami University CIO David Seidl says, “I think the transition from CAPEX to OPEX is a real thing, and that it is changing financial models. For example, historical chargeback models are worth changing.” Agreeing, Manhattanville College CIO Jim Russell says, “For organizations with strained budgets and significant physical deferred maintenance, they still need time to swap OPEX for CAPEX. But there is more to it than swap or legacy practices.”
Clearly, many organizations went all-in on their OPEX models. Too few seem to have worked through the impact monthly bills they have to pay, or their vendors will flip the switch.
Related Article: CIOs: Time to Sense Transformational Needs, Create Agility
The Role of Data Agility
CFOs should not forget data in their move to modernize finance. Over the last several years, CFOs have pushed their organizations to be less about backward facing bean counting and more strategic and forward facing. Many CFOs have even pushed their organizations to become more data driven — these CFOs are a natural partner for CIOs and CDOs wanting to push the data agenda. In some cases, CFOs have even taken personal responsibility for driving the data agenda. I would like to suggest here and now that it is a mistake to consider financial transformation without considering the overarching data agenda.
CFOs clearly have a vested interest in data and make it trustworthy. In fact several years ago, Frank Friedman suggested in an article in CFO Magazine that CFOs are “the logical choice to own analytics and put them to work to serve the organization’s needs.” To justify his position, Frank made the following claims: CFOs own most of the unprecedented quantities of data that businesses create from supply chains, product processes and customer interactions; many CFOs already use analytics to address their organization’s strategic issues; and CFOs unique can act as a steward of value and an impartial guardian of truth across the organizations. This fact gives them the credibility and trust needed when analytics produce insights that effectively debunk currently accepted wisdom.”
So, CFOs wanting financial transformation should also have a vested interest in getting analytics right. The CFOs that I have talked to say they “rely on data and analytics and they need them to be timely and accurate.” One CFO even told me, “Data is potentially the only competitive advantage left for his firm.”
The reality is businesses get impacted by the maturity of the data agenda in two manners. First, organizations that do not migrate their data and eliminate unneeded IT expenditure have less money to invest in extending their differentiating business capabilities. This can impact a firm’s ability to deliver bottom line profitability. This occurs when business processes do not run as effectively. When this happens, business processes like order to cash run inefficiently.
Making things scarier, enterprises are increasingly finding they need to extend their business capabilities to remain relevant as the impact of digital transformation reduces long standing barriers to entry. The problem is for some IT organizations as much as 70% of the dollars spent on IT is for just keeping the lights on.
Parting Words: Financial Transformation Must Build Value
So clearly, the speed at which business is becoming more agile and transforming to respond to the pace of digital competition is truly having an impact on finance. Historically, software investments got executive and board engagement on the capital committee, but the move to cloud and SaaS subscription models is changing how software is procured.
From this student of transformation’s point of view, if financial transformation includes the business-critical data agenda, then I am a supporter. However, it shouldn’t drain funds that can be used to support digital transformation. Instead, financial transformation should be about building new business value propositions and business models.